DGDF?

Is the dollar going down forever? Well, to paraphrase Benjamin Franklin, nothing is forever except death and taxes, but it certainly seems that the DGDF crowd is having their day (week? month? quarter?) in the sun.

The normative question of whether the dollar should go down "forever" is an emotive one; Macro Man is generally sceptical of such arguments, particularly in the current context when the US current acccount deficit (usual source of DGDF $ bearishness) is eminently reasonable by the standards of the past decade or so. Moreover, a number of the currencies that have performed best against the buck recently (here's lookin' at you, NZD and ZAR!) haven't exactly been paragons of balance of payment virtue themselves.

However, while market focus is usually (and justifiably) on the flow of currency movements (i.e., portfolio flow versus the US need to finance an ongoing c/a deficit), it seems as if the current bout of dollar weakness may have more to do with a stock adjustment...i.e., Asian and Middles East CBs reducing the share of dollars in the reserve bounties that they've accumulated over the past year or so.

Throw in a step-shift in the perceived equilibrium level of USD/JPY, thanks to DPJ laissez-faire, add a dash of flow recycling from Asian CBs standing in the way of overdue currency appreciation (so what else is new?) , and throw in a pinch of dollar-negative seasonality, and these are the things of which market trends are made.

EUR/USD has broken up to new highs for the year, courtesy of both public and private-sector flow. Near-term resistance lies at last December's high of 1.4719 and the Sep '08 high of 1.4866; above those levels, there's quite a bit of fresh air.The breakout was confirmed, or indeed foreshadowed, by therally in precious metals a few weeks ago. Gold is not far below its nominal high of 1032 (though obviously well below its real high), but there appears to be more near-term upside in silver, which has broken and held the key $16 level.There are still a few holes in the DGDF story, however, particularly if it's one predicated on a cyclical rebound. Base metals have been taken to the smelter recently (boom, boom), whereas one might reasonably expect the rising tide of a broad-based DGDF-deval to lift all boats...even those made of base metals. The chart of aluminum is indicative of the complex.Similarly, oil (as measured by CLZ9) is off its recent lows, but doesn't exactly scream "breakout!!!" Now, this may be down to promised OPEC supply, or it may be down to spec limits. But in a world where the dollar truly is "going down forever" and inventories are sharply off their highs (though admittedly above long-run averages), one might reasonably posit that crude would have put in a better show.So how are we left? Much as it pains Macro Man to say it, it looks like we may well be at the mercy of his old adversaries, the FX reserve managers. Should they continue their recent behaviour and consistently buy EUR/USD in the open market, the private sector will happily piggy-back and a trend will be born.

Should they pull the bid and start selling (because as you know, punting someone else's currency for a percent is a vital part of FX reserve management), well.....then we might find that the dollar going down isn't forever after all....

Compared to the LDP, they are definitely laissez-faire when it comes to the yen. Were the old boys still in power, we'd have been treated to a battery of comments on how they are watching FX movements carefully, how volatility is undesirable, how they will mull action...and we may have even had a few drivebys from kampo.

Not forever –until elections are secured. It could cost some gold. To Carry on. If the thingy gets too nervous then a leggy down perhaps a swap tick wide. But not into campaign. Such is the way of this new win win market.

Saddle up for the year end rally.Coming into september everyone was fearing a pullback, but the fact is that many institutions are underinvested. With the final months of 2009 approaching they are sitting on loads of cash and even larger ytd underperformance, this is what get money managers in trouble. Remeber what happen in the end of 1999 when money managers were in a similar positions.

the dollar HAS BEEN going down "forever". when the federal reserve was created in 1913 the dollar was $20.67/oz. today, it is over $1000/oz. of course all fiat monies are falling (fiat money always goes to its intrinsic value), they are just falling at different rates.

4. Bullish USTs but Long $/JPY trade? So how does our view of falling US yields, encapsulated in our decision to go long 10Y USTs tactically yesterday, sit with our long $/JPY strategic trade? Especially with rate differentials playing a key role for the Yen, as we have highlighted above. The Fed not hiking rates before the end of 2010 remains our US team’s core view. We think the widening output gap and disinflationary pressures will be a significant dynamic keeping the Fed on hold for an extended period of time and US rates we think will reflect this. However, we are also still holding on to our long $/JPY trade. The rational for launching this as a longer term ‘strategic trade’ as opposed to our short term ‘tactical’ trades reflects our belief in the fundamentals of the trade, but less certainty over timing. Rate differentials may yet still move in favour of the trade further out as US yields reprice after hitting bottom while Japanese yields should remain relatively anchored. Japan with its weak fundamentals and pronounced deflationary pressures stand out even in G3 space. The increased bifurcation of Japan and US financial conditions (tightening for Japan and loosening for the US) continue to skew recovery prospects towards relative improvement in the US compared to Japan. The continued strength in JPY only seeks to reaffirm this conclusion.Positioning is another factor to consider. Markets have seemed to have gotten moderately bullish Yen in recent weeks as indicated by our Yen sentiment index. Until recent weeks, the index has been in Yen bearish territory for most of the year. Positioning currently therefore is not an obstacle for moves higher in $/JPY.

look: on jpymkt sold off, usdjpy sells off mkt rallied, usdjpy flat to down (recently)

+ usdjpy is a dog sandwich... its definition has changed. and the reason is: that china fx crew is selling $ to buy, jpy, eur, gold. fundies are not going to be the primary mover in this mkt.also, if you like the deflationary theme for 10yrs, jpy will rip. we just saw it happen 10months ago...

on 10 yrsim cool w playing deflation w 10yrs. but only short term. here is why. if the mkt drops. you will get your 10yr bid. but it wont last, bc as we've seen ben b will drop another qe nuke on the mkt to restimulate inflationary efforts. he's not going to dabble again w alphabet soup, hes gonna continue to use the big guns. which will steepen the yield curve 'ultimately'.

im not a big fan...however 'jim o' did call +gbp on the bottom and it was very impressive

Was that a "boom-boom" like Basil Brush, MM? The awesome diversity of your cultural references is what keeps me coming back to this blog. Oh, yeah, and the charts... poetry... hip-hop...

Pretty much agreed with all this from 3:37:

on 10 yrs im cool w playing deflation w 10yrs. but only short term. here is why. if the mkt drops. you will get your 10yr bid. [the "flight to quantity" trade - also unwind of carry will support both USD AND JPY, like last yr].

but it wont last, bc as we've seen ben b will drop another qe nuke on the mkt to restimulate inflationary efforts. [yes, but things have to get a bit dire again before they do it, they will want to generate some panic buying of Tsys at some point]

If there is one thing we have learned it is that once this mkt has a direction it can trade one way for much longer than expected in a way that defies logic and analysis [viz: Feb-March 6, and July-now]

thank you for comments. where consensus earnings for next year now? i think $90. so S&P 1 year forward is on a 8% earnings yield? where are 1 year risk free yields, 1%? that seems like a lot of risk premium. so until rates move higher i can't see this market coming off. why shouldn't the market be back at lehman level? other measures ranging from the ISM, credit spreads etc are. as the recent survey showed, people biased towards caution. the pain trade is up. clearly if things continue like this, rates have to move up. that will hurt. anyone have any suggestions on how to take out affordable optionality on a rate hike?

MM, I am a firm believer of what master tapereader George Douglas Taylor talked of "market engineering"in 1945.

I supect NZ is a market makers currency (they probably control it wholly) and it moves in waves continuously for an extended period.If you see the charts you will find the NZD spiking up to 2500 pips in a matter of hour and come back to the original level.

The whole operation looks like PacMan being unleashed to trigger margin calls, entry stops, stoploss and trail stops. It can happen only when the currency is in the control of a strong hand.

Your thoughts in general on "market engineering" and insight on Kiwi, commanding such a premium because of the country's ability to produce milk, will be greatly appreciated.